August 4th, 2022 - Market Update
Current position: Carefully floating ahead of tomorrow’s jobs report
Stocks and Mortgage Bonds are both slightly higher to start the day.
The Fed has been in tightening mode, not just by hiking the Fed Funds Rate, but also by reducing their balance sheet.
The Fed holds Treasuries and Mortgage-Backed Securities on their balance sheet. When Treasuries mature, or when they receive principal payments from the MBS they hold, someone sells their home, refinances, or they mature, the Fed receives that money.
Normally, this would mean that their balance sheet would reduce over time, so long as they are not purchasing. Up until June, they were reinvesting all of those proceeds, keeping their balance sheet net neutral, which has been very stimulative to the markets.
Beginning in June, the Fed started to reduce their balance sheet by $47.5B, which is broken down into $30B in Treasuries and $17.5B in MBS. That means that the Fed is allowing that amount to run off their balance sheet and is reinvesting any excess over that.
It is important to note that the Fed is not selling their holdings of Treasuries and MBS, they are just not reinvesting $47.5B. So far, the market has improved since June and it has not had a negative effect.
This is because at the same time, origination volume is significantly less than last year, which causes less supply of MBS to come to market - So the runoff has not been a concern.
Come September, the Fed is going to be doubling their runoff, which many are concerned over. We still think it will be absorbed and have a muted impact but we will be monitoring it.
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, increased by 4,000 to 260,000. The four-week moving average, which removes some of the noise, moved up once again and is at the highest level since late November. This report can be the "canary in a coal mine" to show that the jobs market is starting to soften. While we have not seen major increases in claims in a given week, they have been moving consistently higher.
Continuing Claims, which measures those who continue to receive benefits after their initial claims, rose 48,000 to 1.4 million, which is the highest level since the beginning of April.
Source: MBS Highway
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